Removing the Pebbles in the Regulatory Stream

Several years ago MAPI underwrote landmark research by NERA Economic Consulting that reached an astounding conclusion: Between the first Reagan administration and the second Obama administration, the federal government issued more than 2,300 manufacturing-related regulations or an average of almost 1.5 per week for more than three decades. The report also showed that between 1998 and 2014, the cost of manufacturing-related rules grew far more rapidly than manufacturing itself: manufacturing regulations expanded an average of 7.6% per year in that time compared to average growth of 0.4% for manufacturing output.

After 35 years of this regulatory assault on American manufacturing, the torrent of regulations has slowed to a trickle. In the first six months of the Trump administration, the federal government issued 405 final rules – less than one-third of the rules issued under the Obama administration in its first six months, and less than one-quarter of the rules issue under George W. Bush in the same time frame.

The administration’s effort to jump-start economic growth through a more streamlined approach to governance also includes an executive order to federal agencies to eliminate two existing regulations for every new regulation introduced. The impact of this change has been striking. According to the American Action Forum, in eight years under the Obama administration, federal agencies reported that they added $890 billion in compliance costs to society’s already considerable burden, or more than $100 billion a year. The total for additional compliance costs by federal agencies in the first 10 months of the Trump administration? $0.

While multiple other long-awaited pro-growth policy changes remain elusive, this is one that should have decisively positive ramifications for manufacturing growth.

Applauding a less burdensome regulatory system doesn’t mean I don’t appreciate the purpose regulations serve. The problem isn’t the efficacy of any individual regulation, but the impact on manufacturing and the economy when regulations are tallied in the aggregate. Each week, each month, each year, new rules have been piled on top of older ones, with no thought to how they interact with each other or how they might exacerbate compliance challenges that already exist. Who doubts that this creates an uncoordinated, inefficient and burdensome mountain of bureaucracy for businesses, especially small ones?

There’s even a term for this phenomena. Michael Mandel, chief economic strategist at the Progressive Policy Institute, calls it the “pebbles in the stream” effect. Just as no single pebble will affect the flow of a stream, for the most part, no single regulation will hinder economic expansion. But throw in enough small pebbles, and you’ll dam up a stream. By the same logic, with enough layered regulations the world’s most innovative, dynamic economy – and the manufacturing sector within it – starts to sputter.

Worse, the federal government doesn’t even have a firm grasp of the number of pebbles it’s thrown into the manufacturing stream. Going through the record a few years ago, NERA couldn’t measure the impact of all manufacturing-related regulations, because Executive Order 12866 only requires executive branch agencies to report costs for “major” regulations—those determined to have an annual effect on the economy of $100 million or more. Almost 90% of regulations that affect manufacturers don’t meet that threshold, so we were unable to glean cost estimates for them. In addition, the Office of Management and Budget (OMB) has no jurisdiction to require cost-benefit analysis by independent regulatory agencies such as the Securities and Exchange Commission, which oversees the complex financial rules under Sarbanes-Oxley and Dodd-Frank. NERA estimated that unaccounted regulations could—when aggregated—have a comparable economic impact to the cost of all reported major regulations. That would mean OMB is significantly underestimating the impact of the regulatory system on businesses.

Why is this so important? Assuming you agree that having a vibrant manufacturing base is important to American society, the sector needs all the help it can get. At the height of the recession, it contracted more than 20%. While the overall economy regained pre-recession levels of output back in 2011, manufacturing has yet to recover fully. The continuous regulatory bombardment during the previous administration served as an anchor around the sector’s neck.

The current respite after more than three decades of relentless rulemaking is so important – indeed, in this technology-driven globally competitive environment, perhaps even more important now than ever before.